An analysis of the key factors that determine business growth in Malta

Abstract

This dissertation analyses key macroeconomic and demographic determinants of business growth in Malta. Specifically, it analyses the relationship between business growth and the four variables: gross domestic product (GDP), interest rates, median income and population growth. There are limited scholarly resources which explore such relations in a Maltese context. Thus, the purpose of this study is to determine this relationship in light of Malta’s unique dynamic structure as a small and open economy. To determine this relationship, a quantitative time series regression approach was utilised, with each of the selected variables analysed separately using annual growth data from the period 2012 to 2023. The data was obtained from reliable national and European statistical databases to ensure data validity. Due to changes in EU demographic reporting standards the analysis was divided into two sub-periods (2012-2017 and 2018-2023). In each case, the variables were analysed using simple linear time series regressions, supported by diagnostic tests to uncover any potential regression violations. The findings show that GDP had a weak positive and statistically insignificant influence on business growth during both periods, indicating that aggregate economic expansion does not necessarily mean higher business creation and survival. Interest rates had an insignificant negative effect, indicating Maltese firms’ high reliance on retained earnings rather than external borrowing. Median income uncovered mixed results, shifting from a weak, insignificant positive to a moderately, insignificant negative correlation, suggesting that higher wages would eventually outweigh higher worker productivity. Lastly, population growth showed a statistically significant positive correlation in the first period but moved to a weak positive insignificant relationship in the second period. This is likely due to increasing migration driven growth lacking entrepreneurial spillovers. The results suggest that the conventional variables cannot reliably predict business growth in Malta and thus, must be analysed from Malta’s specific dynamics. Thus, policymakers should implement targeted, sector specific strategies, balance wage policies, enhance financing instruments and promote migrant entrepreneurship to foster sustainable firm growth.